Islamic Finance and Economic Development: Risk, Regulation, and Corporate Governance

PART Four

Corporate Governance

Good corporate governance (CG) is crucial to the ability of a business to protect the interests of its stakeholders. These interests may extend beyond the purely financial to the stakeholders' ethical, religious, or other beliefs. An institution offering Islamic financial services (IIFS) is required to carry out its operations in compliance with the principles of Shari'a. A corporate structure that enables a financial institution to implement good governance through Shari'a-compliant operations is therefore essential for the stability and efficiency of Islamic financial services.

The practices of IIFSs raise specific corporate governance challenges. While a number of problems are common to all financial institutions, two broad sets of CG issues are specific to IIFSs. The first arises from the need to reassure stakeholders that IIFS activities fully comply with the precepts of Islamic jurisprudence.¹ Ultimately, the core mission of such an institution is to meet its stakeholders' desire to conduct their financial business according to Shari'a principles. The same stakeholders also need to be assured that the firm will nonetheless actively promote their financial interests and prove to be an efficient, stable, and trustworthy provider of financial services. This combination of Shari'a compliance and business performance raises specific challenges and agency problems, and underlines the need for distinctive CG structures.

This part deals with CG issues ...